Natural Inequality

Anyone who has missed the ongoing debate about growing income and wealth inequality in the United States and around the world has not been paying attention. Economists, policy-makers, and activists have been calling attention to high levels of inequality, and their implications, for several years. Indeed, there is a strong push to make the American 2016 presidential election a referendum on inequality. Despite the global focus, the discussion has, to date, largely overlooked a significant component of global inequality: growth in the inequality of natural capital levels.

A new article published in Nature by leading ecological economist Edward Barbier attempted to draw attention to this oversight. Barbier starts at the same place most discussions of inequality since 2013 have started: with Thomas Piketty’s tome-like Capital in the Twenty-First Century. One of Piketty’s primary messages is that the wealth of eight of the richest countries in the world has grown from 2-3 times the national income to 4-6 times the national income since the 1970s. Piketty includes the value of natural resources in that calculation. But as Barbier points out, he fails to include the depreciation of natural capital in his calculation. By failing to do so Piketty underestimates inequality in three ways:

By ignoring how depletion of natural capital stocks reduces their ability to contribute to economic growth in the future. Think of a natural resource stock as a bank account that earns interest. If you fund your activities today with the money in that bank account you have less available to fund your activities tomorrow. Measures of your wealth should reflect that. But because of the way we measure natural capital they do not. This failure leads to underestimation of inequality if some countries use natural capital faster than others. And they do.

By failing to recognize disparities in the rate at which countries use natural capital. Barbier highlights data from the World Bank that suggests developing countries use up natural capital 5 times faster than developed ones. So in failing to include this depreciation in his calculations of inequality, Piketty underestimates just how much inequality has grown. To return to our bank account example, developing countries are drawing down their (already smaller) bank accounts faster than developed ones.

Finally, by ignoring the services aspect of natural capital. Barbier calls this ecological (as opposed to natural) capital. Others have called it ecosystem services. Regardless of what you call it, the idea remains the same: natural systems provide a stock of goods that can be depleted for economic growth (i.e. trees cut for timber) as well as a flow of services that generate positive economic value (i.e. hiking through a forest). Think about the bank account example again: you can withdraw the money in the bank account but if you don’t, that money will earn interest. As long as you don’t touch the principal, you will earn interest indefinitely. If you draw down the principal, however, you reduce your future ability to earn interest. When we use up natural capital (say by cutting down a forest) we reduce the amount of services we get from that capital (since few people want to hike through a clear cut). Data from the Millennium Ecosystem Assessment suggests that 60% of our global ecosystem services have been degraded or used unsustainably.

So by failing to fully account for the value of natural and ecological capital, Piketty’s already high estimates of global inequality are likely underestimates. But what does that mean in an economic sense? Most people have a visceral dislike for inequality, but what does it mean in numbers when we say that including degradation of natural capital makes poorer countries even poorer?

Barbier attempts to answer that question by providing an estimate of the value lost in Thailand from the destruction of mangroves along the coast. Mangrove forests provide direct benefits (natural capital) in the form of timber from their harvest. They provide indirect benefits (ecological capital) in the form of flood protection, water filtration, and nurseries for commercial fisheries. These mangroves have been slowly cut down since the 1970s. Barbier estimates over the last forty years the harvest has cost each Thai citizen $40 in foregone benefits. That net loss of $2.73 billion has never been accounted for in Thai national accounts.

Mangroves are far from the only example of unmeasured degradation in natural capital stocks. Another recent article suggests that in the last 50 years we’ve reached peak use of 20 of 27 surveyed resources. In other words, we’re now drawing down the principal of many of our natural resources rather than living off the interest.

Measuring the value of natural capital is important in its own right. It is important to understand how our modern economy still depends on the natural world. But now, with the renewed policy focus on global inequality, Barbier has provided a second reason why measuring natural capital is important; when values of natural capital are included in calculations of inequality, the world appears even more unequal than previously thought.

Patrick Behrer is currently a PhD candidate in Public Policy at Harvard University and the Editor in Chief of S&S. Prior to Harvard he earned a Masters in Natural Resource Economics at Colorado State University and was a Fulbright Fellow in Environmental Management in New Zealand.